Cowen, the investment bank, recently surveyed 300 US restaurants to gather intelligence on market trends. While we’d always prefer to see larger data sets (there are over 650,000 US restaurants after all), we must appreciate any data when we can get them.
The gist of Cowen’s report was that POS and payments are merging. While you’d be hard-pressed to find someone who’s been in the industry over the past 12 months with more than five brain cells (which might be asking for a lot, honestly) that didn’t understand this, they wouldn’t have the data Cowen gathered to put some teeth to it.
Sorry to disappoint, but most of what Cowen put out reinforces what we’ve been reporting on for ~3 years.
Now let’s have some fun.
Of the 300 restaurants surveyed, half currently use a restaurant specific POS system. 55% of restaurants with >$500,000 of annual processing volume employ a vertical specific POS.
Cowen report
So who are the 45% restaurants that are actively trying to go out of business? POS is not easy. Monkeying on the keyboard for a weekend (i.e. building an ISO POS) is not sufficient if you’re going to run a real enterprise, and by the time you reach $500,000 it’s probably put up or shut up. We suspect these 45% were oversold POS systems from their payments providers and are regretting the decisions now. Over time higher percentages of customers will be on purpose-built POS systems.
Of the 18% of respondents considering a switch from their current payment provider, 57% cited a desire to upgrade the POS/service issues as the reason for contemplating a change.
Cowen report
Wait: you mean payments providers and POS resellers, both of whom are singularly focused on payments processing residuals these days, are not adequately supporting merchants? Nobody ever saw this coming.
Older POS technology also has lots of support issues; anecdotally a large merchant finally replaced NCR Aloha and saw their support volume decrease by 30% as soon as their new POS systems were implemented. We talked with the new POS provider and they thought the reason the drop was only 30% was because the systems were so new that the franchisees were still getting comfortable with the changes. By the time this gets ironed out the support costs would be > 50% less than NCR Aloha.
…traditional customer acquisition channels (such as the bank channel) are under increasing pressure from a savvy customer base growing more comfortable with self-sourcing solutions or using specialized Dealer/distributor networks – in turn opening the door for new POS entrants to make headway vs. incumbents. The importance of traditional sales channels – namely the bank channel and direct feet on the street – appears to be waning with over 65% of respondents having self-sourced their payment processing or via a POS partner referral (40% of restaurants surveyed self-sourced while 25% were referred by a POS partner).
Cowen report
The internet is finally showing legs in brick and mortar. To us this means that merchants are starting to do self-discovery. We view this as a large macro trend that will only accelerate. Think of it this way: proprietors opening SMB locations now have had the new-age Apple consumer experience in their personal lives for nearly 20 years. Every day they’re using tools like AirBnB, Dropbox, or Spotify. Then they open up a restaurant or retail establishment and find out they’re expected to deal with this?!
Um, no thank you.
As time marches on business owners get smarter, not dumber. Today’s average 35-year-old loves the internet and doesn’t pretend to care about what happens to his data. And this 35-year-old is the guy opening tomorrow’s main street businesses.
More broadly, a whopping 56% of respondents indicated they would be comfortable setting up their POS system themselves.
Cowen report
Per the above, POS systems are getting easier to install and merchants more accustomed to seamless commerce. This is especially true in SMB where budgets are tight. Can you think of the last time you bought a PC and paid a tech to set it up for you? If you think the POS is going to be any different go ahead and throw yourself a retirement party now.
Cowen then asked their respondents to rank the most valuable add-on from their POS provider. Ready yourself: payments processing never made it on the list. That’s because payments processing is a value detractor, not a value adder.
25% of restaurants placed the greatest emphasis on kitchen/order management, followed by Data & Analytics (20%) with Marketing/Loyalty tools and access to more payment choices tied for third (16% each). Access to capital was prioritized by only 8% of respondents.
Cowen report
Of the 9% of respondents that were dissatisfied with their POS, 54% said that pricing was too high while another 25% thought their POS malfunctioned too frequently. In the case of the latter remote access and cloud connectivity can squish bugs faster. The former complaint is immensely fascinating. We have two schools of thought on this.
- The POS is legitimately too expensive because these merchants got in bed with a POS that only offered one payments processing option and that provider started ratcheting their rates. If you’re dumb enough to get in bed with a POS that only offers one processing option after we – and others – have been writing about this for two years, that’s on you.
- Merchants are a textbook study on cognitive dissonance. They’d never buy a Ferrari for $0.47 because they know the car would fall apart before it rolled off the lot but they expect their POS to be free. You can partly blame the VCs and payments processors who have perverted the upfront POS economics with their balance sheets, but come on. The POS runs your entire f*cking business. If you refuse to invest in a quality “brain” for your business you deserve to go bankrupt. We bet you carry a new mobile phone in your pocket, lease a car you can’t afford, and own a flat screen TV that’s bigger than your front door. But investing in a system that pays the bills for my over-extended lifestyle? No way…
We did find one data point that we strongly disagreed with.
We took the opportunity to survey restaurant operators on delivery and note 50% of respondents indicated delivery sales are worth the associated commissions, or double the number of respondents who indicate the opposite.
Cowen report
If you ask 100 monkeys which way the sun was shining all you’d get is covered in shit.
Restaurants have no idea what good business looks like; remember, these were the same people signing up for daily deals until they were bankrupt. We simply don’t believe the math behind this charade and it’s even more intriguing that none of these providers have provided any evidence of “incremental” customers that we’ve ever seen. With these hollow promises the delivery providers should at least consider running for public office.
Our analysis confirms that the appetite for robust software solutions is only rising, with standalone payment processing increasingly viewed as commoditized.
Cowen report
This is pretty much bad news bears for acquirers that don’t have a POS strategy. We’d be very curious to learn how Worldpay’s strategy of neutrality is paying off in this war. Now we don’t think payments companies have the culture to support POS long term, but in the short time we have to imagine that Worldpay is feeling some heat.
There are also great statistics in here for POS breakdown. Of the merchants that responded, guess how many were Aloha or Micros? And how many were the new entrants like Square, Clover, and Toast?
Well, for that you’d really need to get your hands on the report. Cowen did a great job putting this together and you should ask them for the rest. For the full report reach out to George Mihalos at george.mihalos[at]cowen.com
At least this data confirms we’re not crazy.
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